1 The Potential Impacts of a Shrinking State Budget VACO Finance Steering Committee Updated August 19, 2009.

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The Potential Impacts of a Shrinking State Budget

VACO Finance Steering Committee

Updated August 19, 2009

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State Budget Summary• Governor announced $300 mil. FY09 GF revenue shortfall and expected

additional $1.2 billion FY10 GF shortfall, with only $287 mil. in Rainy Day funds available to cushion reduction. Governor will announce FY10 state budget cuts by Labor Day using executive authority.

• Reduced federal stimulus in FY11 (and expiring after) and a weak economic recovery will result in even tougher 2010-12 state budget.

- $1,304 mil. ARRA for FY10; $811 mil. ARRA for FY11.*

• Despite recent federal match rate increase, Medicaid and other HHS cost pressures continue, putting additional strain on the state budget.

• Because of falling real estate and car values, and reduced sales and business taxes and fees, it will be difficult for localities to continue backfilling declining state support.

• Major policy changes will be required to align funding levels with revenues, unless state and/or local taxes are raised significantly.

- Even with little re-benchmarking increases, K-12 funding policies will most likely be modified.

* Includes state appropriated ARRA that effectively supplants GF

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9.2 percent decline in state GF revenue for FY09 and expected 1.6 percent decline in FY10, meaning more budget cuts above the over $4 billion already taken.Need 10+ percent growth in FY11 to fund existing spending policies in the 2010-12 biennium.

General Fund Revenue Forecast Changes Since Last Year

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10est.

2008 Adopted

2009 Introduced

2009 Adopted

Aug. '09 Interim

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Over Next Few Years, State Budget Will Continue to Be Under Severe Pressure

• FY10 GF revenues will be $750 mil. below FY06 GF revenues.

• K-12, Medicaid, and Other HHS programs (60% of GF) have grown the fastest in last 10 years. Virginia’s Medicaid program hard to reduce since it already ranks 48th among all states.- $962.5 mil. available in ARRA Medicaid federal match increase for 2008-10, only $322 mil. available for FY11.

• State K-12 aid already reduced 10 percent in FY10. $365 mil. federal ARRA only partial and temporary offset. Other local aid primarily reduced through the $50 mil. “flexible” cut.

• However, budget still not yet right-sized for new revenue reality – “one-times” used for half of 2008-10 budget balancing.

• Transportation program also shrinking rapidly and big concern.

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Where Has the State Budget Grown? 10 Year Growth in the GF Budget *

Final AnnualizedFY 1998-00 GF % GF FY 2008-10 GF % GF % Growth

Direct Aid to K-12* $7,053.10 32.8% $12,153.4 35.6% 5.6%

Medicaid $2,428.6 11.3% $5,495.4 16.1% 8.5%

Other Health & Human Serv. $1,753.3 8.2% $3,246.0 9.5% 6.4%

Higher & Other Education $3,143.80 14.6% $3,911.2 11.5% 2.2%

Public Safety $2,333.60 10.9% $3,564.4 10.4% 4.3%

All Other $4,761.10 22.2% $5,776.4 16.9% 2.0%

Total* $21,473.5 100.0% $34,146.9 100.0% 4.7%

* Includes Lottery Profits

* Appropriated ARRA included where GF will be needed to keep current policy, primarily SFSF K-12 and Medicaid match increase

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GF Millions $

Rainy Day Fund Withdrawal $490

Tax Policy/Other Revenue Items $450

Budget Reductions $1,925

Bonded Debt for GF Capital $355

Enhanced ARRA Medicaid Match $962

ARRA SFSF - Flexible Funds * $109

ARRA SFSF - K12 $365

"One Times" Were Half of Strategies to Close the 2008-10 Budget Gap

* Another $109 mil. kept in reserve for FY 10.

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General Fund Tax Changes Over Last 10 Years Cost $1.9B in 2008-10 Biennium

FY Implemented 2008-10 ($ Mil.)

Car Tax Relief 1999 ($1,900)

Historic Rehab Tax Credit 1999 ($92)

Low Income Tax Relief 2000 and 2007 ($125)

Land Preservation Tax Credit 2003 ($300)

2004 Tax Reforms 2005 $1,600

Add'l Reduced Sales Tax on Food 2006 ($381)

Shift Insurance Premiums and Recordation Taxes for Transportation 2009 ($352)

Estate Tax Repeal 2009 ($311)

Total ($1,861)

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GF Budget Outlook ($ Millions) FY 2010 FY 2011 FY 2012

Gov. Aug. Forecast (-1.6%, 3.8%, 5.3%)* $14,079 $14,618 $15,389Transfers $415 $329 $339Rainy Day Fund Withdrawal (1/2 of bal.) $287

Total Est. GF Available $14,781 $14,947 $15,728

Expenditures (FY10 Adopted):

Legislative and Executive Dept's $96 $96 $96Judicial Dept. $407 $407 $407Planned GF Debt Service** $507 $645 $684Admin., Finance (w/o debt), & Tech $859 $859 $859Commerce and Trade, Agr., Nat. Res. $258 $258 $258K-12 Direct Aid *** $5,320 $5,320 $5,320K-12 Rebenchmarking: 7-22-09 DOE draft $60 $79

Higher & Other Education $1,832 $1,832 $1,832Medicaid $2,317 $2,800 $3,200Other HHS $1,628 $1,659 $1,694

Public Safety $1,755 $1,755 $1,755Transportation $41 $41 $41Central Appr. (incl. car tax), Capital) $824 $1,051 $1,051

Total Expenditures $15,844 $16,782 $17,275

Projected Scenario Gap ($1,062) ($1,835) ($1,547)

* $300 mil. FY09 shortfall means carryforward balance, unappr. balance, and ARRA reserve unavailable for FY10

** Includes G.O. VPBA, VCBA, Long-term Leases, Regional Jail debt

*** Does not include lottery, assumes support cost reduction in base

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State Aid to Localities, Concentrated in 5 Programs, Has Already Been Cut

Original GF Appropriation

Current GF Appropriation % Change

% of State Aid to

LocalitiesK-12 Direct Education Aid* $6,391,513,050 $5,750,141,500 -10.0% 72.4%

Car Tax $950,000,000 $950,000,000 0.0% 12.0%

Compensation Board $666,153,186 $631,050,421 -5.3% 7.9%

Comprehensive Services Act $323,640,564 $315,840,564 -2.4% 4.0%

Aid to Police Depts (HB 599) $205,001,876 $197,295,927 -3.8% 2.5%

DJJ Juvenile Confinement/Treatment $50,787,956 $50,787,956 0.0% 0.6%

Recordation Tax Distribution $40,000,000 $40,000,000 0.0% 0.5%

DCJS Admin. of Justice $21,908,828 $23,408,828 6.8% 0.3%

Public Library Aid $17,378,628 $17,378,628 0.0% 0.2%

State Board of Elections $7,392,674 $7,392,674 0.0% 0.1%

Rolling Stock Tax $4,970,000 $5,670,000 14.1% 0.1%

DSS General Relief $3,458,455 $3,458,455 0.0% 0.0%

Flexible State Aid Reduction ($50,000,000) ($50,000,000) 0.0% -0.6%

Subtotal $8,632,205,217 $7,942,424,953 -8.0% 100.0%

Total GF Appropriations* $18,019,470,000 $16,274,230,000 -9.7%

* Includes Lottery Proceeds

Major Categories of State Aid to LocalitiesFY 2010 GF Appropriations

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Education Funding Summary• The State already reduced FY10 K-12 funding by over $600 million

GF – only partially offset by federal stimulus funding.• Expect additional FY10 K-12 cuts because of an est. further $1.1 bil.

GF shortfall. K-12 is 35% of state GF. FY10 support position funding will not likely be restored.

• State and local revenue problems will be compounded when federal stimulus funding ends after FY11.

• Localities are holding Virginia’s public education system together by spending $3 billion more per year than required by the state. - In total, localities spend 82% more than required by state.- This excess pays for 22% of all K-12 spending.

• Due to falling real estate and car values, and reduced sales and business taxes and fees, it will be difficult for localities to continue backfilling declining state support.

• Even with only minimal preliminary rebenchmarking costs ($138 mil.), major policy changes will be required to align funding levels with revenues, unless state and/or local taxes are significantly raised.

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FY 2010 K-12 Direct Aid* ChangesFY 2010 Education Changes

FY 2010 Original Distribution incl. lottery $6,543,818,612

Technical: ADM, Sales Tax, Census, and Lottery Revisions ($138,464,023)

Benefit & Compensation Changes ($74,289,696)

Modify Lottery to Support GF Programs ($55,805,042)

Set Support Position Cap at 4.03 Instructional Positions per Support Position ($340,934,092)

Remove School Construction Grants ($27,499,997)

Total Adopted FY10 K-12 $5,906,825,763

Change from Original ($636,992,849)

% Change from Original -9.7%

Appropriated ARRA Stimulus $365,187,984

Adopted Total with ARRA Funding $6,271,334,747

$ Change with ARRA Funding ($272,483,865)

% Change with ARRA -4.2%

*DOE distributions from 2009 session, including lottery, VPSA and other non-general funds

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2010-12 Preliminary K-12 Rebenchmarking of $138 Million Reflects the Recession

• Major Inputs that Increased Cost Compared to 2008-2010:

– Enrollment Projections– Free Lunch Eligibility– Federal Revenue Deduct

Per Pupil Amount– Pupil Transportation

• Major Inputs that Increased Cost Compared to 2008-2010:

– Enrollment Projections– Free Lunch Eligibility– Federal Revenue Deduct

Per Pupil Amount– Pupil Transportation

• Major Inputs that Decreased Cost Compared to 2008-2010:

– Funded Instructional Salaries

– Funded Support Salaries– Special Education Child

Counts– Statewide Average SOL

Failure Rate– Inflation Factors– Health Care Premium– Textbook Expenditures

• Major Inputs that Decreased Cost Compared to 2008-2010:

– Funded Instructional Salaries

– Funded Support Salaries– Special Education Child

Counts– Statewide Average SOL

Failure Rate– Inflation Factors– Health Care Premium– Textbook Expenditures

Source:July 22, 2009 DOE Presentation

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The Severe Revenue Shortfall Makes It Likely the State Will Alter Current K-12

Policies in the 2010-2012 Budget• There are seven key components to the SOQ funding formula:

- Number of students- Staffing ratios for teachers and other funded positions- Salaries of teachers and other funded positions- Fringe benefit rates- Standard and prevailing support costs- Inflation factors- Prevailing federal revenues related to support costs

Approximately 79 percent of SOQ funding is for salaries and benefits

FY10 budget already reduced support cost funding by $341 mil. per year

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“Standards of Quality” Already Push Localities to Pay $3 Bil. More for Education Than Required

• State does not pay for all Board of Education approved standards.

• The state methodology (LWA) overemphasizes the generally lower values in the more numerous/smaller school divisions in calculating prevailing costs for teacher and support positions.

• FY08 base year for 2010-12 re-benchmarking does not reflect real-time salary costs. There were also no state teacher compensation supplements in 2008-10.

• Most localities go beyond state mandates, especially for at-risk student funding, including lowering class sizes to help meet SOL and SOA requirements.

• Expect the new state support position cap to increase local overfunding.

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Examples of Previous Proposals for State K-12 Budget Reductions

Adopted• One-third reduction in support position funding (1:4.03 instructional

positions) adopted for FY 10 appropriations ($341 mil.). Still considering policy for 2010-12.

Proposed• 2004 Governor proposal to deduct 100% of federal revenue from

SOQ ($177 mil.) • 2004 House proposal to lower state contributions for teacher

retirement by capping the contribution rate.• 2008 House proposal to recognize only state funded salary increases

in re-benchmarking process ($227 mil.). • 2008 House proposal to remove cap on the federal deduct ($22 mil.)• 2009 Committee discussion to defer state textbook funding ($79 mil.)• 2009 Governor’s proposal to supplant remaining additional lottery

support for school construction and operating costs ($61 mil.)

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Possible K-12 Operating Funding Scenario

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

$7,000,000,000

$8,000,000,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

State

Local

FederalCharges for Services

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Large Increases in Real Property Tax Revenues are Ending

Percent Increase in Real Property Taxes

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

?

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Average Sale Price in Northern Virginia, Hampton Roads, and RichmondLevels

Seasonally-adjusted 2-quarter moving average

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

99q1 99q3 00q1 00q3 01q1 01q3 02q1 02q3 03q1 03q3 04q1 04q3 05q1 05q3 06q1 06q3 07q1 07q3 08q1 08q3 09q1

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

Northern Virg inia Hampton Roads Richmond39% 22% 11%

Northern Virginia

Ham pton Roads

Richm ond

(% share of to tal home sales in V irginia)

Average Sale Price2008 Q1 2009 Q1 % Growth

Northern Virginia $439,185 $325,215 -26%Hampton Roads 279,509 247,036 -12%Richmond 279,466 237,437 -15%

Reprint from John Layman presentation to June 12 VML Leg, Comm.

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Shrinking Transportation Program

• In June, the CTB approved a budget and new six-year improvement program for 2010-2015 that:

– Had $3.2 billion less for highway construction than the 2008-2013 program

– 20% less transit operating support than the 2008-2013 program

• On August 19, the Governor announced an additional $900 million six-year reduction in transportation revenues.

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Major Policy Changes Proposed for FY09 - FY15 Six-Year VDOT Program

• Construction program primarily a federal match program and largely eliminates state formula distributions for unpaved roads, primary, secondary and urban systems.

• Adequate secondary road maintenance funding no longer available if all federal funds are to be matched.

• Surface Transportation Program federal formula funding will no longer be distributed by locality starting in FY11. CTB will do the programming.

• State can support no more than $2 billion in debt - unable to issue all $3 billion in bonds authorized in 2007.